COVID-19 strikes Chile
The COVID-19 crisis has rapidly taken over the political and social scene, overshadowing expectations that spring would be dominated by the campaign for an April 26th constitutional plebiscite. Virus cases have climbed from 60 to 238 over the past few days.
As elsewhere, it is hard to predict the economic impact on the economy. Chile might land on its feet. First, Chile’s main exports are not especially dependent upon the global supply chain. The price of copper has fallen more than 10% ytd, but the oil price fall has been far greater, and fuels represent about 15% of imports. Second, though fiscal debt has been rising, it is still well below that of most other countries. Third, the Central Bank is independent, with sound reserves and management. Fourth, the banking system seems well capitalized and supervised.
We believe that in its next monetary policy meeting on March 31st the Central Bank will cut the TPM to 0.5%, as during the global financial crisis. We are certain that a substantial fiscal stimulus package is coming.
GDP growth forecasts are being revised downward, with consensus for 2020 quickly moving to around 0% from 1%. We believe this is a reasonable projection, if the social crisis doesn’t intensify, if there is no global financial crisis and if by Q4 the global economy shifts toward recovery. All are very big ifs.
The outlook for inflation is more uncertain, given high exchange rate and gas price volatility. We’ll probably have to revise the forecast downward. The base scenario is for fluctuation in the higher part of the 2% - 4% target range for the rest of the year, and then in the lower part in 2021. The peso has depreciated 14% against the dollar for the year to March 23rd.
The government took a few weeks to get a grip on the COVID-19 situation. Finally on March 18th, President Sebastián Piñera declared a “state of catastrophe,” which allows for the restriction of certain freedoms (such as movement, assembly and property). Piñera said that his interest is in maintaining supply chains, patient care and defense and security. Chile seems to be slowly shutting down. The usual scenes can be seen in supermarkets.
It seems increasingly clear that COVID-19 will extend uncertainty over the constitutional revision process. While all major political parties have agreed that the health of Chileans comes first, implementing changes will be a challenge, as they’d require Congress to convene, and to pass another constitutional amendment. In essence this will mean another negotiation similar to the one in November 2019 that set the process in motion. And the UDI, which initially signed on to the deal, has been getting cold feet. Even if an agreement is reached, the implementation schedule will have to be extended. The process will now almost certainly outlive Piñera’s administration.
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